What Is a Property Title?
Before diving into the insurance, it’s important to understand what a “title” is. A title is not a physical document but the legal concept of ownership. It grants you the right to own, use, and sell a property. When you purchase a home, the seller transfers this title to you using a legal document called a deed, which is then recorded in public records.
However, issues from the property’s past, known as “defects” or “clouds,” can interfere with your ownership rights. These can include anything from unpaid property taxes to forged signatures on previous deeds.
How Does Title Insurance Work?
The process generally involves two key steps that occur during the home closing process:
- Title Search: A title company or real estate attorney conducts an in-depth examination of public records related to the property. They search for any potential problems, such as outstanding liens (e.g., from unpaid contractors or taxes), unresolved claims from previous owners or heirs, and errors in public records. The goal is to identify and resolve these issues before you finalize the purchase.
- Insurance Policy Issuance: Once the search is complete and any immediate issues are cleared, the title company issues one or more insurance policies. This policy acts as a guarantee: if a covered title problem that existed before your purchase is discovered later, the insurance company will cover the costs of defending your title in court and any resulting financial losses up to the policy amount.
What Are the Different Types of Title Insurance?
There are two distinct types of title insurance policies—one that protects your lender and one that protects you. Your lender will almost always require you to purchase a policy for them.
1. Lender’s Title Insurance
This policy protects the mortgage lender’s financial interest in the property. It ensures that the lender has a valid, enforceable lien on the property. If a title dispute arises, this policy repays the lender for the outstanding balance of the loan. The coverage amount decreases as you pay down your mortgage and expires once the loan is paid off. This policy is required to get a mortgage.
2. Owner’s Title Insurance
This policy protects you, the homeowner. It defends your ownership rights against any covered title defects. You pay a one-time premium at closing, and the policy protects your equity for as long as you or your heirs own the property. While technically optional, it is highly recommended to avoid potentially devastating financial losses from hidden title issues.
Here’s a simple breakdown of the key differences:
| Feature | Owner’s Title Insurance | Lender’s Title Insurance |
|---|---|---|
| Who It Protects | Homeowner (and their heirs) | Mortgage Lender |
| Is It Required? | Optional (but highly recommended) | Almost always required for a mortgage |
| Premium | One-time fee paid at closing | One-time fee paid at closing |
| Coverage Amount | The home’s full purchase price | The outstanding loan amount |
| Policy Duration | As long as you or your heirs own the property | Until the mortgage is paid off |
How Much Does Title Insurance Cost?
The cost of title insurance varies by state and the home’s purchase price but typically ranges from 0.5% to 1.0% of the property value. It is a one-time fee paid as part of your mortgage closing costs. Who pays for the policy—the buyer or the seller—is often determined by local custom and can be a point of negotiation in the home sale.
Do I Need a New Policy if I Refinance?
Yes, but only for the lender. When you refinance your mortgage, you are creating a new loan, so the new lender will require a new lender’s title insurance policy. This protects their new investment. However, your original owner’s policy remains in effect and continues to protect your ownership rights, so you do not need to purchase a new one for yourself.
For more detailed information, the Consumer Financial Protection Bureau (CFPB) offers a helpful guide on the topic.